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Asking Friends for Money - Do's and Don'ts

It isn't easy to ask people you know and love for a loan. The process can dredge up bad feelings and leave borrower and lender alike unhappy with the results.


There's no way to ensure things will go smoothly. But an important first step is to treat the lender like a "disinterested third party" and "let emotion go by the wayside," says Joseph Astrachan, executive director of the Cox Family Enterprise Center at Coles College of Business in Georgia.


In other words, don't rely on your history with the lender to seal the deal, and don't play emotional games to get what you want—treat it like a regular business arrangement.


Here are some tips from experts about how to keep things as professional as possible.


Put yourself in the lender's shoes.You know the person you're borrowing from personally—so imagine what he or she will think when you ask for a loan. If you were in their position, what would you want to ask? What misgivings might you have? Anticipate any questions and concerns, and craft a clear business and payback plan to assuage those doubts, says Charles Matthews, a professor of entrepreneurship and strategy at the University of Cincinnati.


Borrow the money as you would from a bank. Do it as a loan and set an interest rate, says Carmen Bianchi, president of the Family Firm Institute in Boston. Not only does this setup make the loan deductible, she explains, it also can smooth emotional concerns: You won't feel like you're taking advantage of your lender, and the lender won't feel used.


Bring in a lawyer to draw up the agreement. "The biggest regret people have is that they did not have adequate agreements in writing, out front," says Doug Hickok, a strategic planner and business coach in Richmond, Va. People inevitably get emotional in these situations and overlook crucial points, he says, so buy an hour or two of a lawyer's time to put the agreement into good language.


Ask for more money than you think you need. Often, a borrower underestimates how much it costs to start a business, says Ted Sarenski, a member of the American Institute of Certified Public Accountants, in Syracuse, N.Y. If your business later suffers from lack of funds, your lender might think that you're running it poorly—when in fact you just didn't plan right from the beginning. So, be more conservative in your revenue projections, he advises, "and a lot more aggressive in terms of your expense projections."


Assume the worst. Of course, you want to imagine that your business will be successful, but what if you can't pay back the money? Will this endanger your relationship with the person you have borrowed from? It's an important question to consider because it often happens, says Charles Oransky, a lawyer specializing in business law in Newark, N.J. Depending on your answer, you may or may not want to proceed with the loan.


Remember "Hamlet." Mr. Matthews reminds entrepreneurs of some sobering advice from Shakespeare:

"Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry."


Those words are spoken by Polonius, who probably understood a thing or two about payback.


Source: Wall Street Journal, 5/21/2002 by Matthew Kassel



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